Econometrica: Apr, 1968, Volume 36, Issue 2
Money, Portfolio Balance, Capital Accumulation, and Economic Growth
Most growth models, whether they be of the Keynesian-Kaldor, Harrodian, or Solow-Swan type, ignore or at least minimize the role of the money supply in the process of accumulation and growth. In general, real factors rather than monetary phenomena are emphasized. There has been little success in developing a theory of capital accumulation and growth which unites Keynesian marginal efficiency and liquidity preference concepts. Instead, full employment is often made a precondition of the analysis. Tobin has, at least, attempted to study the relationship between money and growth but his system is defective since it omits the construction of a demand for capital schedule by entrepreneurs that can be formulated independently of the savings propensity and portfolio decisions of households. (An independent investment demand function--the essence of the static Keynesian system--is often omitted in growth analysis.) This paper shows Tobin's model is applicable only to nonmonetary Say's Law economies, and attempts to remedy the defects of such an analysis. In a modern monetary, market-oriented economy, full employment is likely to be neither automatic nor a position of stable equilibrium (as Phillips curves imply a highly unstable full employment price level). To assume full employment as a precondition is to remove the problem of the role of the money supply in the process of accumulation and growth from the real world. This paper presents an analysis which allows the examination of the role of money within the context of a Keynesian system permitting independent savings, investment and liquidity preference functions. It does not make full employment a precondition of the model.